Clause 34 - Annual exempt amount

Part of Finance Bill – in a Public Bill Committee at 9:00 am on 14th June 2012.

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Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education) 9:00 am, 14th June 2012

It is a pleasure to serve under your chairmanship, Mr Sheridan.

Following the announcement in the 2011 autumn statement, clause 34 freezes the capital gains annual exempt amount—the AEA—at £10,600 for 2012-13, the same as for 2011-12. The AEA, similar to the personal allowance in the income tax system, is the amount of capital gain an individual can make before they have to pay capital gains tax. Clause 34 also requires that AEA rises in line with the consumer prices index, the CPI, instead of the retail prices index, from 2013-14 onwards. That was announced by the Government in the 2011 Budget.

According to the tax information and impact note published at the time of the 2011 autumn statement, the measure is expected to yield £25 million in 2012-13, 2013-14, 2015-16 and £30 million in 2016-17. I want to address the issue of the move to the consumer prices index. The Government state that the CPI is the most appropriate measure of the general level of prices. However, the net effect of the Government’s decision to shift the indexation from RPI to CPI is essentially a stealth tax increase for millions of taxpayers. Is the  Minister satisfied that the public are adequately aware of the changes? Does he accept that an element of stealth could be perceived in the way in which the measure has been introduced? Seemingly small changes—the freezing of the AEA and linking increases to CPI rather than RPI—will have a bigger impact over time. With no indexation in the capital gains system now, a high inflationary environment could boost tax receipts simply through fiscal drag, where taxation increases automatically as taxpayers move into higher brackets due to inflation.

Has the Minister undertaken an assessment of how many more people will be brought into capital gains tax because of the freeze and the slower growth in the AEA? Does the measure mean that more people will be brought into the self-assessment system and has the additional burden on HMRC been taken into account? If so, has the Minister assessed the cost of that? Does the Minister accept that, taken in isolation, these measures create fiscal drag and are therefore regressive?

Our amendment asks the Chancellor to review the impact of this proposal on the number of taxpayers brought into capital gains tax and for a report of the review to be placed in the Library, and, therefore, I urge hon. Members to support it.